What is credit?

Credit is unsecured lending, which means you don’t have to offer any security like a house or a car to borrow money.

This means it’s offered against your ‘credit score’, which is a method of deciding how reliable you are as a borrower. The better your score, the more you’ll be able to borrow and the lower the interest rate you’ll be able to get.

How much does a credit card cost?

The biggest cost to understand is interest rate. This is how much your credit will cost you. For example if you want to borrow £1,000 with your credit and the rate is 15% it will cost you £150.

However, the interest rate applies to the entire year (which is why it’s called Annualised Percentage Rate, or APR). It will only cost you £150 if you take a whole year to pay back £1,000.

On a monthly basis it will cost 15 ÷ 12 = 1.25. So borrow £1000 at 15% APR costs £12.50 per month. To see how much card debt costs use our calculator:

There are other costs:

Late payment fees

Foreign transaction fees

Balance transfer fees

Cash advance fees

What should I use a credit card for?

On the simplest level they’re meant to be used to spend, particularly where you need to spend before you have the cash (so before payday for example).

You also need to note that your credit is not really meant to be used as cash, so you should not use a credit card to withdraw money from a cash machine, as this incurs quite expensive charges.

The most sensible way to use your credit card is for spending on things like:

Reward cards – Credit cards help you earn loyalty points for merchandise, travel and discounts as you spend.

Cashback cards – Cards that give you a percentage of the amount of money you spend back as cash.

How do you get a credit card?

Getting a credit card is simple. You can apply for many online, or you can get one from a highstreet bank if you’d prefer.

Typically, you have to:

Be over 18

Be a UK resident

Have a minimum guaranteed annual income (usually £10,000+)

But these are only the bare essentials requirements of your typical credit card and the eligibility criteria varies between cards.

1. Check your credit score

You don’t have to but your credit score decides the cards you can and cannot get. Knowing it advance can help you decide if you should apply for a card. If you’re apply for a card and get rejected it will leave a mark on your credit file.

2. Compare credit cards

Credit cards are not born equal. You can get better interest rates, longer 0% interest periods, lower fees, better customer service, and more cashback from different card providers, so shop around before you decide on a card.

3. Apply for a card

Fill out the online form or the paper form in a bank branch. Usually you are told instantly whether you’ve been accepted, but it could take a little longer. You may have to sign some paper forms, but many online providers accept an e-signature.

4. Wait for it to arrive in the post

Your credit card will be mailed to you and your PIN number will be sent shortly after. You can then start spending with your card.

5. Arrange monthly repayments

Make sure to arrange to meet at least your minimum monthly repayments (typically £5 or a percentage of the total you owe, but some cards require you repay your balance in full each month). If you don’t you will face late payment fees and your credit file will be affected.

What’s a good first credit card?

This all depends on your financial situation and credit score. You should aim to get a card with the lowest APR possible, or if you plan to pay off your balance in full every month you should find a card that offers the best rewards or cashback.

If you have no history of borrowing you may have a low score, which means you may have to start with a credit builder card, which tend to have higher interest rates. But if you use this card responsibly your score should improve within a year or so.

How to use a credit card responsibly

Whilst credit cards are nothing to be afraid there are still risks involved.

Firstly make sure you can at the very least meet the minimum monthly repayments. If you consistently miss repayments your credit score will suffer making it difficult to borrow in the future.

Also whenever possible make more than the minimum repayments. You should always aim to clear your card balances as soon as you possibly can, or before any 0% interest periods expire. This will save you a lot of money on interest charges. If you are struggling with credit card debt our guide on getting out of debt may be useful.

Whilst it may be tempting to splurge and max out your credit limits, resist spending more than you can afford to repay. You don’t want to be caught in a situation where your interest charges are piling up.

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